How to short Bitcoin: a step-by-step guide to short-selling BTC

With its limited supply, protocol-regulated rate of issuance, and generally rising popularity and demand, Bitcoin has — over the decade or so of its existence — managed to outperform typical assets by a large margin. However, this long-term price appreciation hasn't happened without sharp drops and several bearish phases along the way.

While buying and holding BTC (i.e., longing) has historically been a popular trade over time, the opposite is also true. Periods of decline present opportunities for traders willing to sell BTC high and buy it back lower (i.e., shorting).

In this next installment of our beginner's guide to cryptocurrency trading, we'll introduce the concept of short-selling Bitcoin. The information we present here will be beneficial for crypto traders wanting to expand their available toolset and for those attempting to make gains during a sustained bear market.

How to short Bitcoin: the basics

We'll first look at the basics of taking a position in a market by considering the difference between being long on an asset and being short.

Next, we'll explain the mechanics of shorting with easy-to-follow examples and also introduce some advanced techniques traders use to earn extra gains from BTC downturns.

We'll also consider the main risks of shorting BTC when compared to taking a long position. With no ceiling on theoretical losses and with gains capped, shorting at the wrong moment can have catastrophic consequences for your portfolio.

Finally, for those interested in short-selling BTC, we explain exactly how to short Bitcoin with a step-by-step guide on OKX.

What does being long or being short mean in a market?

Crypto traders often use the terms "long" and "short" to describe positions in a market. If a trader is long on an asset — such as a security, commodity or cryptocurrency — they'll enjoy gains if the asset's price increases. On the other hand, when a trader is short, they'll enjoy gains if the asset's price decreases.

In essence, crypto traders can choose to go long or short based on their view and sentiment of the market. The common expression "buy low, sell high" references a basic long position. Conversely, the reverse would be true for those short-selling the asset.

Being short on an asset is the opposite. A trader is betting on its price falling. To achieve this, they usually borrow the asset and immediately sell it for the current market price. If the asset's price decreases, they can close their position by repurchasing — known as covering the short — and returning it to the lender. This allows the trader to earn gains from the price difference.

While the origins of the terms are unclear, they're universally used today across stock, foreign exchange, commodity, and cryptocurrency markets. Therefore, if you're an aspiring trader, you should have a solid understanding of what it means to be long or short on an asset.

Choosing when to short BTC

Clever use of a short-selling strategy allows a trader to make money when the price of BTC is falling. The most obvious time this would be useful is during a Bitcoin bear market, like that of 2022, when BTC plunged 65%.

Experienced and skilled crypto traders can make money on regular price drops and corrections during bull markets, too. With technical analysis of past price patterns, experienced traders can determine when a move to the downside looks more likely than appreciation.

However, technical analysis isn't an exact science, and prudent traders always seek to hedge positions and practice risk management. While a discussion of risk-management measures is outside the scope of this article, users may find our introductory guide to day trading crypto useful with its trading tips.

How does shorting Bitcoin work?

When you short BTC or any other cryptocurrency, an exchange will perform the necessary steps behind the scenes on your behalf. However, it's important to know these steps and the process for you to understand how shorting BTC works.

When you enter a Bitcoin short position, you first borrow BTC from your exchange and immediately sell it at the current market price. If BTC's price falls while your position is open, you'll be in the green since the price of BTC is now lower than when you previously opened your short BTC position at. This allows you to "cover" the short by buying back the asset at a lower price. The difference between the opening and closing price will be your overall gains.

For example, sensing the market is overheated, you enter a short position with 1 BTC when the price is exactly $35,000. Over the next week or two, the price falls to $30,000 and you decide to close your position. You repurchase the same amount, 1 BTC, to cover the short, and then return it to the exchange to close the position.

Your gains from this trade — minus any exchange fees — will be $5,000. This is because you originally received $35,000 from the sale of the borrowed BTC and spent $30,000 repurchasing it to repay the debt.

Although this might sound more complicated than simply buying BTC and hoping to sell it at a higher price, the exchange abstracts the process away from traders. As we explain in the later section about shorting BTC on OKX, you don't have to manually borrow the BTC, initiate its sale, and later return the borrowed BTC. Instead, the platform performs these steps for you, making the process of short-selling almost as simple as buying and selling spot BTC.

Risks when shorting Bitcoin

What makes short-selling a bit more daunting for beginner traders is that shorting is often framed as a more advanced trading strategy. When timed well, it can yield plenty of gains. However, short-selling carries additional risks compared to those associated with taking a long position in a spot market — i.e., buying BTC from an exchange to sell at a higher price later.

What happens when you long BTC?

When going long on any spot pair, your potential downside — or the amount you stand to lose — is capped. Regardless of your price per BTC or the size of your position, you can only lose the capital you initially spent. For example, if you bought 0.1 BTC at $35,000 and the price suddenly went to $0, you could lose a maximum of $3,500.

Similarly, the upside potential on a spot long position is technically infinite. Presume in the example above that you held your 0.1 BTC for a few years. If, over that time, Bitcoin rose to become a world reserve asset, with 1 BTC hitting $100,000, $1 million, or even $10 million, your gains would be 10% of whatever price you eventually sold your position at.

What happens when you short BTC?

When shorting BTC, the opposite is true. Your potential losses are theoretically infinite and gains are capped. This is ultimately what scares off beginners because the losses can outweigh the amount of funds in a trader's portfolio. Even though the most you stand to gain from a simple short is 100% of your initial position size, the potential losses can theoretically be uncapped as long as the cryptocurrency you're shorting continues to rally.

Take the hypothetical scenario we used previously to better demonstrate the potential losses a crypto trader can expect from short-selling BTC. You open your short by selling 0.1 BTC at $35,000, anticipating a move to the downside. Bullish news events follow, however, and take the price to $65,000. In this scenario, your total loss would be $3,000 since the price to buy-back the 0.1 BTC is now $6,500.

Whether or not you're allowed to keep your short trade open until your losses reach such high figures depends on the amount of margin power your account balance can command. Unfortunately, an exchange will automatically close your short position if your account balance is unable to cover these losses and repurchase the borrowed assets.

Advanced short-selling tools and strategies

Now you understand the mechanics of short-selling, we can introduce some techniques that skilled crypto traders use to maximize their gains when prices are dropping. While we don't recommend them to novice traders, they're worth understanding — particularly if you want to take your trading to the next level.

Leverage/margin trading

Margin trading refers to the practice of trading assets using borrowed funds. The margin itself is the difference between the capital that the trader contributes to the position and the total funds borrowed.

The term leverage is often used in conjunction with margin trading. It refers to the multiple of your initial capital borrowed from the exchange. For example, if you had $1,000 and wanted to open a long position with 10x leverage, your margin would be $9,000, making a total position of $10,000.

Traders can also short with leverage. Again, the process is the same as previously described, except that the trader enlarges their position with additional borrowed funds.

It's important to remember that leverage amplifies both gains and losses. This is why the use of leverage by newer traders isn't recommended. In highly volatile crypto markets, a sudden price move can wipe out an over-leveraged position (i.e., a position with a very high ratio of debt when compared to your trading account's balance), which could lead to forced liquidation.

We explain margin and leverage trading in more detail in a dedicated guide to the subject.

Futures, options, and perpetual swaps

Shorting is an essential concept for futures, options, and perpetual swap traders to understand. Futures, options, and perpetual swaps are financial instruments offered by exchanges like OKX. They enable traders to bet on the future prices of cryptocurrencies.

When trading futures, a trader must buy or sell the underlying asset at the specified expiry date. Options, by contrast, give the trader the right, but not the obligation — hence, the option — to buy or sell the asset at the expiry date. Finally, perpetual swaps have no expiry dates but do require traders to fund positions in the green.

Futures, options, and perpetual swap trades can be either long or short, and traders can use leverage to amplify their positions. We explain cryptocurrency futures, options, and perpetual swaps in greater detail in our dedicated guide.

How to short Bitcoin on OKX

As mentioned, exchanges like OKX make shorting cryptocurrencies very straightforward. Traders don't need to concern themselves with the borrowing and repaying of assets, as the exchange abstracts the short-selling process and facilitates it for them.

To open a BTC short at OKX, just log in to your trading account and follow these simple steps:

Step 1: head to the "Trade" section

Select Trade at the top of the OKX homepage and choose either "Unified Account Mode" or "Classic Account Mode." The following guidance uses the Unified Account Mode, but the steps will be similar regardless of your choice.

Step 2: choose the asset you want to short

If you want to short Bitcoin against USDT, select BTC/USDT from the dropdown list of trading pairs in the top left-hand corner of the screen.

Step 3: select the product with which you want to short BTC

When shorting BTC on OKX, you'll need to use the perpetual swap, futures, options or margin products. You can choose which product to short with from the menu at the top of the list of trading pairs.

Step 4: enter your trade details

For this example, we'll presume you're trading BTC/USDT perpetual swaps. However, this step will be similar regardless of the actual product with which you're shorting BTC.

First, choose between limit, market, and stop order types. Then, enter the price you wish to short from, the desired leverage multiple — choose 1x for no leverage — and the amount of BTC you want to short.

Finally, double-check the details entered and select the red "Open" short button.

Your order will appear in the "Open order" section of the trading dashboard until it's filled. Once filled, you can check your short position under the "Positions" section.

Step 5: close your position

When you want to close a position, head to the "Positions" tab. Then, fill in the amount corresponding to the position you want to close. You don't need to exit your position entirely — closing part of it is a good way to lock in gains while still keeping some price exposure.

Finally, select the "Close" button on the right of the open position. You can also choose to close all your positions at the current market price by selecting the green "MKT Close All" button.

The current trend of BTC

As of April 4, 2024, Bitcoin's last traded price is $66,221. BTC prices have rallied in recent weeks due to rampant speculation regarding the Bitcoin halving that's due to happen in April 2024. As the initial euphoria seems to have cooled over the past few days as Bitcoin prices stabilize, bearish crypto traders are calling this the calm before the storm and are a expecting a further dip ahead of the halving. This is typically the case days prior to a major catalyst, as crypto traders lock in their gains before a volatile event like the Bitcoin halving.

Should you short BTC: using simple moving average

BTC USDT SMA chart April 24
A chart showing the simple moving averages for BTC/USDT, as of April 4, 2024.

Judging by the death cross that's about to form within the next couple of days, Bitcoin prices might dip in the near-term. This bearish chart pattern that could be about to play out ultimately implies that it may be the right time for bearish crypto traders to proceed with short-selling BTC given how close the 50-day moving average is to falling below the 200-day moving average.

Should you short BTC: using relative strength index

BTC USDT RSI chart April 24
A chart showing the relative strength index for BTC/USDT, as of April 4, 2024.

Besides making use of moving averages, the relative strength index (RSI) technical indicator may also be used to complement the case for shorting Bitcoin. As a momentum indicator that measures the speed and change of price movements, RSI helps traders to understand if a cryptocurrency is oversold or overbought given its current momentum. From the BTCUSDT chart above, Bitcoin leans closer to being at a neutral status as the RSI value is close to 42. This might be the reason why BTC has been trading in a range between $65,000 and $67,000 over the past few days.

From this neutral RSI status, some bearish crypto traders might assume that the crypto market is cautiously optimistic about BTC's continued rally. Alongside the death cross that implies continued price depreciation, Bitcoin's momentum seems to be on a downward trend as BTC looks to retest the $64,500 price level since the sudden dip from $70,000. For crypto traders with a bearish inclination, this temporary bounce in BTC prices may provide traders who possess a higher risk tolerance with a potential opportunity to short-sell BTC at these levels.

How to short Bitcoin: a BTC short example

As a very simple guide on how to short Bitcoin, here's some basic technical analysis crypto traders like you can perform to analyze essentials like support and resistance lines, and the overall trend of BTC.

BTC USDT indicators April 24
A chart showing the MA, RSI, and trend-based fibonacci extension indicators for BTC/USDT, as of April 4, 2024.

Looking at the chart above and the trend-based fibonacci extension technical indicator, we can see that BTC's price is currently hovering between the 0.382 and 0.5 levels. Bearish crypto traders may want to consider making use of these levels to determine their entry and exit when shorting BTC. If BTC's price fails to break out of the $66,830.50 level and shows signs of slowing bullish momentum, short-sellers can opt to pile on to take advantage of this by shorting Bitcoin and considering profit taking at $63,730, which acts as the 0.618 level of the trend-based fibonacci extension.

While all signs point towards a bullish rally given the news of an impending Bitcoin halving, crypto traders should evaluate the risk-reward ratio that comes with taking on such a trade. Although going long might be the popular choice among Bitcoin traders, it could be seen as an overcrowded trade with limited upside as Bitcoin prices might struggle to retest previous all-time highs. With both technical indicators being aligned, bearish crypto traders might argue that we're due for a short-term pullback before the eventual rally post Bitcoin halving. Therefore, experienced crypto traders may wish to take advantage of this brief correction by shorting Bitcoin with a tight stop-loss to prevent their account from being strongly impacted.

Closing thoughts — should you short Bitcoin?

Having the option to short Bitcoin gives traders greater flexibility. A skilled trader will often use a mix of both long and short positions to reap gains from market volatility as well as to hedge and manage risk. Meanwhile, the use of leverage, options, futures, and perpetual contracts can bring even greater sophistication to a strategy.

However, with an infinite downside, shorting carries more risks than simple spot trading. Using leverage only compounds these risks, so it's wise to make sure you fully understand your downside potential before taking short positions — particularly on unpredictable, volatile assets like BTC.

If you're interested in shorting Bitcoin but are concerned about the risk, you can get a much better understanding of it by using OKX's demo trading account. Under "Assets," select "Start demo trading" to enter a few test positions to see how they perform. You can later move to real markets when you feel comfortable with your knowledge and skills.

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